Entrepreneurs have many misconceptions about the consequences of involving private equity in their companies. However, apart from adding cash injections, PE can bring a whole suite of benefits to a business, writes Alexis Sikorsy
When entrepreneurs hear the term ‘private equity’ (PE), their initial reaction often includes fear and scepticism.
Concerns about losing control, drastic changes or even being ousted from their own companies can loom large.
However, based on my personal experience, these fears are largely unfounded.
Engaging with private equity can significantly benefit founders and their businesses in ways they might not have anticipated. Here’s why founders should embrace, rather than fear, private equity.
Gaining Control
One of the primary fears of founders is losing control of their company when they sell to private equity.
My experience with New Access, a software development company I co-founded in Switzerland, demonstrates that the reality is often the opposite.
By bringing in outside investment, founders can actually gain more control over the strategic direction of their company.
With the infusion of capital from our PE partners, we were able to hire better talent, invest in new technologies and explore growth opportunities that were previously out of reach due to financial constraints.
Private equity firms bring not just money, but also expertise.
They provide strategic guidance and operational support, which can help founders make more informed decisions and steer their companies more effectively.
When PE firms invest, they work alongside the existing management to improve the company’s profitability and help achieve its business plan, rather than imposing their own agenda.
This collaborative effort ensures that the founder’s vision is respected and enhanced, not undermined.
Shared Goals and Collaborative Efforts
Another misconception is that private equity firms are only interested in making a quick profit, often at
the expense of the company’s long-term health.
However, most PE firms are deeply invested in the success of the companies they acquire.
Their goals are aligned with those of the founders: to grow the company and increase its value.
This means that rather than working against the founders, PE firms are there to support and collaborate with them.
For instance, PE firms have extensive experience in various industries and bring a wealth of knowledge and networks that can open new doors for business development.
They often have a portfolio of companies, and the insights gained from these can be invaluable.
They help in identifying cost-saving opportunities, enhancing operational efficiencies, and driving growth initiatives that a founder might not have the resources or experience to pursue on their own.
Strategic Growth and Expertise
Private equity firms are well-versed in scaling businesses.
They focus on companies with profit and growth potential and know how to unlock hidden value.
For example, PE firms are adept at optimising company structures, improving financial reporting, and enhancing sales strategies.
This level of expertise can lead to substantial growth, as was the case for New Access, which enjoyed increased revenues and market presence after PE investment.
Moreover, PE firms can provide access to top-tier talent that founders might struggle to attract independently.
A well-connected PE firm can help bring in experienced executives who can drive the company forward, making a significant impact on its growth trajectory.
The collaborative approach ensures that founders are not alone in their journey and can rely on experienced partners to navigate challenges and seize opportunities.
Financial Security and Flexibility
Engaging with private equity can also provide financial security and flexibility.
The infusion of capital allows founders to de-risk their personal financial situation while
still retaining a significant stake in the company.
This dual benefit ensures that founders can secure their financial future while continuing to grow their business.
In my case, selling a majority stake allowed me to stay involved in the company’s operations while benefiting from the PE firm’s resources and expertise.
This arrangement provided an opportunity for a second, potentially more lucrative exit down the line when the company had grown further under PE management.
Overcoming Common Misconceptions
The horror stories about PE firms stripping companies and firing employees within months are largely exaggerated.
While there are cases where management changes are necessary, these are not the norm. Most PE firms prefer to retain existing management and build on the company’s current strengths.
They recognise that the founder’s vision and leadership are often integral to the company’s success.
The relationship between a PE firm and a company is symbiotic. Both parties aim to achieve growth and increased value, which benefits everyone involved.
By understanding this dynamic, founders can see PE as a partner rather than an adversary.
In conclusion, private equity should not be a source of fear for founders. Instead, it should be viewed as a powerful tool that can help unlock a company’s full potential.
By providing capital, expertise and strategic support, PE firms can help founders achieve their business goals and secure their financial futures.
Embracing private equity can lead to unprecedented growth and success, making it a compelling option for entrepreneurs looking to take their companies to the next level.
Alexis Sikorsky started a software company called New Access in Switzerland in 2000.
Twenty years later, he sold it to a PE firm for a nine-figure sum and set up Alex Sikorsky Consulting Ltd, enabling SMEs to build their business and develop effective growth strategies leading to a PE exit.
He has now distilled decades of insight into his new book Cashing Out (Rethink Press, €21.75) to empower entrepreneurs through the PE process